## IN THE SUPREME COURT O F TEX AS

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. 12-0045

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### R O B E R T 

### W A Y N E 

### S N E E D 

### , J A M E S 

### H

. T IC H E N O R 

### , F R E D 

### W O L G E L 

### , J A M E S 

### F

. O ’ D O N N E L L 

### , T E X A S 

### U N IT E D 

### C O R P O R A T IO N 

### , A N D 

### U N IT E D 

### S A L T 

### C O R P O R A T IO N 

### , P E T IT IO N E R S 

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v. 

### L L O Y D 

### P

. W E B R E 

### , J R


### . , I N D IV ID U A L L Y A N D 

### D E R IV A T IV E L Y O N 

### B E H A L F O F 

### T E X A S 

### U N IT E D 

### C O R P O R A T IO N A N D 

### U N IT E D 

### S A L T 

### C O R P O R A T IO N 

### , R E S P O N D E N T S

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O N P E T I T I O N F O R R E V I E W F R O M T H E C O U R T O F A P P E A L S F O R T H E F I R S T D I S T R I C T O F T E X A S

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Argued Septem ber 16, 2014

J U S T I C E G R E E N delivere d the opinion of the Court.

The business judgme nt rule in Texas g ener ally protec ts corpor ate office rs and direc tors, who
owe f iduciary duties to the corpor ation, from liability for a cts that are within the honest exercise of
their business judgme nt and discretion. See Cates v. Sparkman , 11 S.W

. 846, 848–49 (Tex. 1889).
This case involves application of the business judgme nt rule to a share holder deriva tive lawsuit broug ht on behalf of a closely held corpor ation. A share holder of a closely held par ent cor

poration

asser ted a deriva tive lawsuit on behalf of the par ent cor

poration’s wholly owned subsidiary ag ainst
one of the s ubsidiary ’s di rec tors and several of the s ubsidiary ’s o ff i cer s, manag ers, and employ ees for fra ud and brea ch of fiduciar

y duties. The trial court conclude d that the share holder did not havestanding to bring the deriva tive lawsuit and g rante d the defe ndants’ pleas to the juris d i ct i on and

motions to dismiss

. The court of appea ls reve rsed and held that the share holder had double-de rivative standing t o s u e, and that the bus iness judgme nt rule did not impose a jurisdi ctional barrier that the
share holder had to overc ome t o bring a derivative l awsuit on behalf of a closely held c o rp o ra t i on. 358 S.W .3d 322, 326 (Tex. App.—Houston [1st Dist.] 2011). The petitioners raise three issues: (1)
what role does the business judgme nt rule play whe n a share holder bring s a deriva tive lawsuit on beha l f o f a closely held corpor ation; (2) whether a share holder plaintiff must establish deriva tive standing by pleading and proving jurisdictional fac ts to overc ome the boar d of direc tors’ business judgme nt not to pursue the closely held co rp o ra t i o n ’s cause of action; and (3) whether Texas

rec og nizes the conce pt of double-de rivative standing , wh i ch en ables a share holder of a pare nt
corpor ation to bring a deriva tive lawsuit on behalf of a wholly owned subsidiary

. We aff irm the court of appe als’ judg ment.
I. F actual and Proc edural Backgroun d
This c ase demonstrates the close ties within c losely held corpor ations. I n 1926, C.J

. Webre
started a family business mining salt from underg round salt cave rns in Hockley , Texas. The family
business g rew and beca me profitable. Over time, the famil y business evolved into multipl e
corpor ations and companies, wholly owned subsidiaries, an d af fi l iates that eng ag ed in brine production and salt manufa cturing

. Texas Br ine Company , L L C and other rela ted entities drilled
wells into salt cave rns to produce and rec over brine. The brine producing line of companies also used
the underg ro u n d cave rns by injecting g as or liquid hy droca rbons for storag e. Texas United

2Corporation and its wh o lly owned subsidiary , United Salt Corporation, eng ag ed in the business of

manufa cturing salt products for sale to re tail and business customers.
Owner ship of the entities comprising the family bus i n es s has rema ined within the Webre family

. During the rele vant time in this case , four sibl i n gs

— L l o y d P. Webre, J r., Camille Webre
Tichenor , Mary I ris Webre, and Roberta Webre Rude (collec tively the Webre siblings)—e ach owned
roug hly 24% of the Class A voting stock in Te x as United. I n addition, Camill e Webre Tichenor ’s 1 husband, J ames Tichenor , owned 2.4% of Texas United stock, and the Webre siblings’ uncle, Arnold Webre, owned approximate l y 1.34%. Eac h Texas United share holder serve d on the Texas United
board of direc tors along with Robert Duboise, who for merly serve d as pre sident of Texas United.
Robert Sneed serve d as the p re s i d en t and CEO of Texas United. Sneed also serve d as the

secr etar y and trea surer of Texas Br ine. I n addition to being a share holder and board member, J ames Tichenor serve d as Texas United’s senior vice president. Tichenor also serve d as the vice president
of Texas B rine. Fr ed Wolgel serve d as Texas United’s vice president and g ener al counsel. Wolgel
also serve d as the vice president a nd g ener al counse l of Texas Br ine.
The four Webre siblings also serve d on the board of direc tors of Texas United’s wholly owned subsidiary , United Salt, along with I ris P. Webr e (t heir mother), Arnold Webre (their uncle) , their
brother- in-law J ames Tichenor (Camille Webre Tichenor ’s husband), and Robert Duboise. J am es

T e x a s U n i t e d a l s o i s s u e d n o n - v o t i n g C l a s s B s t o c k , w h i c h w a s o w n e d b y e a c h o f t h e W e b r e s i b l i n g s , a s w e l l 1
a s m u l t i p l e l i m i t e d p a r t n e r s h i p s a n d f a m i l y t r u s t s
. 3O’Donne ll serve d as the president and C EO of United Salt. Fr ed Wolgel serve d as United Salt’s 2
g ener al counsel. Robert Sneed serve d as United Salt’s secr etar y and trea surer during the rele vant time
in this case. Although eac h of the entities comprising the family business was cl o s el y held, the Webre family opera ted them as if they wer e larg er, publicly trade d entities. The entiti es were manag ed in
full observa tion of all corpor ate formalities, there wer e reg ular s h ar eh o l der and board of direc tor meeting s, and the entities kept written rec ords of the actions and resolutions taken at those meeting s. The family bu s i n es s al s o employ ed other staff, employ ees, and office rs to help run the various
entities.
A. The Saltvill e Ac qui sition The disput e in t his case a rose f rom a United Salt business deal to acquir e a salt mining and storag e fac ility in Saltvill e, Virg inia (the Saltvill e Acquisition). Be gi n n i n g in 2006, United Salt’s president, J ames O’Donne ll, prese nted the Saltvill e Acquisition as a new business opportunity to the
board of direc tors. The acquir ed land and fac iliti es would be used to rec over salt for sale, and a plan

was formed to expand the Saltvill e fac iliti es to drill additional wells to extract salt from the brine and

to eventua lly use the underg round cave rns cre ated by t he brining proce ss for g as storag e. Due to

conce rns over the potential liabiliti es of opera ting a g as storag e fac ility , Texas Br ine was to cre ate a

new subsidiary to acquir e the g as storag e opera tions immediately afte r the Saltvi l l e Acquisi tion.

I r i s P

. W e b r e s e r v e d o n t h e U n i t e d S a l t b o a r d o f d i r e c t o r s d u r i n g t h e e v e n t s i n q u e s t i o n
. P r i o r t o D e c e m b e r 2 2 0 0 7 , I r i s P

. W e b r e o w n e d 4 6 % o f t h e v o t i n g s t o c k i n T e x a s U n i t e d

. A t t h a t t i m e , e a c h o f h e r c h i l d r e n o w n e d a b o u t 1 2

. 5 %

. S o m e t i m e a r o u n d D e c e m b e r 2 0 0 7 , I r i s P

. W e b r e s o l d e a c h o f t h e W e b r e s i b l i n g s 1 1

. 5 % o f t h e i s s u e d a n d
o u t s t a n d i n g T e x a s U n i t e d s h a r e s , w h i c h i n c r e a s e d e a c h s i b l i n g ’ s o v e r a l l o w n e r s h i p i n t e r e s t t o 2 4 %

. 4Thus, acc ording to the plan, the newly formed subsidiary , Texas Br ine C o m p an y Saltvill e, L L C,

would acquir e the g as st orag e operations, as well as the associate d liabiliti es, fr om United Salt at a cost of appr ox imately

$3,451,500.
Over the course of sever al y ear s, corporat e re co rds ref lect that the United Salt board of
direc tors took numerous votes and actions with respe ct to conducting , aff irming, and ratify

ing the
Saltvill e Acquisition. Every vote was passed by a majority of t h e Un i t ed S al t board of direc tors.
E v en t u al ly , the United Salt board beca me awa re that the cost of the Saltvill e Acquisition wa s exceeding initial projec tions, and the board commissioned investiga tions i n to the cost overr uns to inquire about any possible wrong doing. The investiga tions included the hiring of an i ndepende nt

acc ounting firm to conduct an audit of the Saltvill e Acquisition, but the acc ounting firm did not find
any fra ud or self-de aling in the pay m en t o f ex p en ditures or costs. Financ ial projec tions for the
Saltvill e Acquisition, which included projec ted cost overr uns, fore caste d that the deal would g ener ate

a net profit of $46 milli on over the first ten y ear s. Eac h of the four Webre siblings, as share holders
of United Salt’s par en t co rp o ration, Texas United, wer e projec ted to rec eive approximately $10
milli on in profit from the de al over the same te n-y ear

period.
One United Salt direc tor, L loy d P. Webre, J r. (Webre) , who was also a Texas United direc tor and share holder, was not convince d about the profitability of the Saltvill e Acquisition. He dissented

ever y time the United Salt board took a vote reg arding the deal. He even visited the Saltvill e fac ility

to question its manag ement about his conce rns. Time and ag ain, he voiced his conce rns at the United
Sa l t d i re ct o r meeting s to his family and the other direc tors, and time and ag ain, a majority of the
board of direc tors voted to proce ed with the Saltville Acquisition.

5B. Th e Lawsu it

After the Saltvill e Acquisition was completed, Webre s u ed a direc tor and sever al of the
office rs and m an age rial employ ees of United Salt and other aff iliated entities in his individual
capa city and deriva tively on behalf of United Salt and Texas United. Webre’s lawsuit was based on his status as a share holder in Texas United. Specifica lly , Webre sued Robert Sneed, J ames Tichenor , Fr ed Wolgel, an d J am es O’Donne ll (collec tively , the individual defe ndants) as the office rs and
manag ers of United Salt and the other entities aff iliated with Texas United. Webre’s orig inal petition 3 alleg ed that the individual defe ndants’ initial prese ntation to the Texas United board of direc tors about the Saltvill e Acquisition ne ver mentioned the possibili ty of opera ting a g as storag e fa cility at the site. Webre alleg ed that in later prese ntations to United Salt’s boa rd of direc tors, the individual
defe ndants prese nted additional information about the Saltvill e Acquisition, b u t ag ain failed to disclose the possibili ty of future g as storag e opera tions. At that time, acc ord i n g t o Webre, the
individual defe ndants wer e executing corpor ate documents in connec tion with the Saltvill e Acquisition that ex pressly contemplated tha t the transac tion would include g as storag e oper ations.
Webre alleg ed that the United Salt board of direc tors relied upon the individual defe ndants’ materia l
non-disclosures and other misrepre sentations, which cause d United Salt to enter into an unprofitable

t ra n s action that lost in excess of $7,000,000 due to the individual defe ndants’ “miscalc ulation s , neg lige nce, e rror s, mismanag ement and la ck of pr oper e x pertise.”

J a m e s T i c h e n o r w a s a l s o a d i r e c t o r o f T e x a s U n i t e d a n d U n i t e d S a l t , a n d w a s a m i n o r i t y s h a r e h o l d e r o f T e x a s 3 U n i t e d

. 6W ebre amende d his petition to alleg e that the individual defe ndants “purpose ly and

fra udulently failed to fully inform t he di re ct o rs of Unit ed S alt about t he full scope of the [ Saltvill e Acquisition] , potential liabiliti es, additional costs, and plans for the future of the Saltvill e Acquisition
and that such actions wer e fra udulent and a brea ch of their fiduciar y duties.” Webre also alleg ed that
the individual defe ndants brea ched their fiduciar y d u t i es b y rec klessly enter ing into contra cts on behalf of United Salt t h at the corpor ation could not perf orm, and that they eng ag ed in fra udulent

conce alment of key information rela ting to the Saltvill e Acquisition. Recog nizi ng the larg e overla p betwee n the manag ement of the entities involved in the Saltvill e Acquisition, Webre alleg ed that the
respe ctive boards of di rec tors relied he avily on the individual defe ndants for a dvice, g uidance , and
i nformation in making corpor ate decisions. This heavy relianc e enabled the individual defe n d an t s
to manipulate the respe ctive boards by providing false or incomplete information. Webre alleg ed that
he visited the Saltvill e site persona lly , discovere d numerous problems associate d with the proposed acquisition, and wrote a letter to the individual defe ndants in April 2007 detailing his conce rns. He alleg ed that the individual def endants failed t o fully

investiga te all of the c oncer

ns prese nted in the letter, and i n a specia l United S alt board meeting later that month, the i ndividual defe ndants failed

to provide the board with complete information to allow the board members t o make an informed
decision about whether to proce ed with the Saltvill e Acquisition. As a result, a majority of the United
Salt board members voted to rea ffirm the Saltvill e Acquisition, and later, acc ordi n g t o Webre, the

numerous problems he pre dicted mater ialized and cause d United Salt a nd Texas U nited signific ant financ ial loss. W ebre also ac cused the individual defenda nts of knowingly or recklessly supply ing

7false information to the United Salt and Texas United boards of direc tors to boost the corpor ations’

financ ial fore casts so the individual defe ndants would rec eive hig her pe rfor mance bonuses.
Texas United and United Salt (collec tively , the co rpora tions) intervene d as indispensable
defe ndants. The corpor ations and the other individual defe ndants (collec tively , the defe ndants) filed specia l exceptions, pleas to the jurisdiction, pleas in abate ment, motions for summary judgme nt, and
motions to dismiss that contende d, among o t h er t h i ng s, that Webre lacke d standing to asser t a share holder de rivative law suit.
The trial c ourt found that Webre lacke d standing to sue, but it did not elabor ate on whether
W ebre ’s lack of standing was based on the double-de rivative nature of the lawsuit or b ec au s e h i s pleading s failed to overc ome the business judgme nt rule. T h e t ri al court g rante d the pleas to the jurisdiction and motio n s t o d i s m i s s the lawsuit, and it did not rule on the motions for summary judgme nt, pleas in aba tement, or spec ial exceptions.
The court of appea ls reve rsed. 358 S.W .3d at 326. Reg arding the business judgme nt rule, the

court of appea ls h el d t h at the trial court should not have dismiss ed Webre’s lawsuit for lack of standing due to his failur e to plead and prove that the direc tors’ decision not to pursue the
corpor ation’s cause s of action was due to fra ud or self-de aling

. Id. at 335–36. The court of appea ls
al so held that beca

use Webre broug ht a share holder deriva tive lawsuit on behalf of a closely hel d
corpor ation, the written demand require ments of Texas Business Corporation Act (TBC A) ar ticle 5.14(C) did not apply

to ba r the lawsuit. Id. at 334, 336–37. I n addition, the court of a ppeals he ld 4

T h e p a r t i e s d o n o t d i s p u t e t h e c o u r t o f a p p e a l s ’ a p p l i c a t i o n o f t h e T B C A , w h i c h f o r m e r l y g o v e r n e d T e x a s 4
c o r p o r a t i o n s , t o t h i s c a s e
. S e e 3 5 8 S

. W

. 3 d a t 3 2 6 n
. 1 ( d e c i d i n g t o a p p l y a r t i c l e 5

. 1 4 o f t h e T B C A b e c a u s e “ [ t ] h e e n t i t i e s a t i s s u e h e r e w e r e f

o r m e d p r i o r t o 2 0 0 6 , a n d t h i s l a w s u i t w a s f i l e d o n A p r i l 1 3 , 2 0 0 9 ” ) ; s e e a l s o T E X
. B U S
. C O R P
. A C T 8that Webre had double-de rivative standing to sue beca use he was a share holder of Texas United, and
he there fore held an equitable owner ship interest in United Salt beca use it was Texas United’s wholly owned subsidiary

. Id. at 333. Finally , the court of appea ls he ld tha t TBCA a rticle 5.14(L ) allowe d
Webre to pursue direc t rec overy ag ainst the individual defe ndants by virtue of a deriva tive lawsuit. 5
Id. at 337.
II. Discussion
This c ase involves closely held corpor ations, which are define d as having few er than thirty

five share holders and “no share s listed o n a national secur ities exchang e or reg ularly quoted in an

over- the-c ounter market by one or more members of a national se curities assoc iation.” T E X
. B U S
. 6
C O R P
. A C T art. 5.14(L )(2)

. J ust last y ear , we descr ibed char acte ristics that are unique to closely held
corpor ations and those who hold owne rship interests in them:

a r t

. 1 1

. 0 2 ( “ T h i s A c t e x p i r e s J a n u a r y 1 , 2 0 1 0

. ” )

. T h e L e g i s l a t u r e e n a c t e d t h e T e x a s B u s i n e s s O r g a n i z a t i o n s C o d e ( T B O C ) t o c o d i f

y s t a t u t e s r e l a t i n g t o b u s i n e s s e n t i t i e s a n d o t h e r f o r - p r o f i t a n d n o n - p r o f

i t p r i v a t e e n t i t i e s , i n c l u d i n g t h e p r o v i s i o n s c o n t a i n e d i n a r t i c l e 5

. 1 4

. S e e A c t o f M a y 1 3 , 2 0 0 3 , 7 8 t h L e g
. , R

. S

. , c h

. 1 8 2 , § 1 , 2 0 0 3 T e x
. G e n
. L a w s 2 6 7 , 4 4 8

– 5 1 ( c u r r e n t v e r s i o n a t T E X
. B U S
. O R G S
. C O D E § § 2 1

. 5 5 1

– . 5 6 3 )

. T h e T B O C a p p l i e s t o e n t i t i e s f o r m e d o r c o n v e r t e d
u n d e r T e x a s l a w a f

t e r J a n u a r y 1 , 2 0 0 6

. S e e T E X
. B U S
. O R G S
. C O D E § § 4 0 2

. 0 0 1 , . 0 0 5

. E n t i t i e s i n e x i s t e n c e o n J a n u a r y 1 , 2 0 0 6 , c o u l d c o n t i n u e t o b e g o v e r n e d b y f o r m e r l a w s u n t i l J a n u a r y 1 , 2 0 1 0 , a f t e r w h i c h t i m e a l l b u s i n e s s e n t i t i e s h a d t o c o n f o r m t o t h e T B O C

. S e e i d

. § 4 0 2

. 0 0 5

. T h e p a r t s o f t h e T B C A a n d T B O C t h a t p e r t a i n t o c l o s e l y h e l d c o r p o r a t i o n s a r e s u b s t a n t i a l l y s i m i l a r a n d t h e o u t c o m e h e r e w o u l d b e t h e s a m e u n d e r e i t h e r s t a t u t e , b u t w e a c c e p t t h e p a r t i e s ’ p o s i t i o n t h a t t h e T B C A i s t h e a p p r o p r i a t e s t a t u t e t o a p p l y i n t h i s c a s e
. S e e i d

. § § 4 0 2

. 0 0 6 , . 0 1 4

.

T h e c o u r t o f a p p e a l s a l s o h e l d i t w a s n o t p r o p e r t o a t t a c k s u b j e c t m a t t e r j u r i s d i c t i o n o n g r o u n d s t h a t W e b r e 5
w a s b a r r e d b y e s t o p p e l f r o m b r i n g i n g a d e r i v a t i v e l a w s u i t b e c a u s e h e a l l e g e d l y b e n e f i t t e d f r o m t h e S a l t v i l l e A c q u i s i t i o n
. 3 5 8 S

. W

. 3 d a t 3 3 4

– 3 5

. T h e d e f e n d a n t s d i d n o t a p p e a l t h a t p o r t i o n o f t h e c o u r t o f a p p e a l s ’ r u l i n g
. A “ c l o s e l y h e l d c o r p o r a t i o n ” i s n o t t o b e c o n f u s e d w i t h a “ c l o s e c o r p o r a t i o n
. ” S e e R i t c h i e v
. R u p e , 4 4 3 6 S

. W

. 3 d 8 5 6 , 8 7 8 n
. 3 4 ( T e x
. 2 0 1 4 )

. O n l y n o n - p u b l i c l y t r a d e d c o r p o r a t i o n s w i t h f e w e r t h a n t h i r t y - f

i v e s h a r e h o l d e r s c a n m e e t t h e d e f

i n i t i o n o f a “ c l o s e l y h e l d c o r p o r a t i o n
. ” S e e T E X
. B U S
. C O R P
. A C T a r t

. 5

. 1 4 ( L ) ( 2 ) ; s e e a l s o R i t c h i e , 4 4 3 S

. W

. 3 d a t 8 7 8 n
. 3 4

. A n y c o r p o r a t i o n c a n “ e l e c t t o o p e r a t e a s a ‘ c l o s e c o r p o r a t i o n ’ b y s o p r o v i d i n g i n t h e a p p r o p r i a t e c o r p o r a t e d o c u m e n t s
. ” R i t c h i e , 4 4 3 S

. W

. 3 d a t 8 7 8 n
. 3 4 ; s e e a l s o T E X
. B U S
. C O R P
. A C T a r t

. 1 2

. 1 1 , 1 2

. 1 3

. 9By definition, a “close ly held” corpor ation is owned by a small number of

share holders whose share s are not publicly trade d. Often, these share holders enjoy persona l rela tionships as fr iends or family members in addition to their business rela tionship. Sometimes, they enter into share holder ag ree ments to define things like their respe ctive manag ement and voting power s, the apportionment of losses and profits, the pay

ment of dividends, and their rig hts to buy or sell their share s from or to e ach other, the corpor ation, or an outside party

. Occ asionally , things don’t work o u t as planned: share holders die, businesses strug g le, rela tionships chang e, and disputes arise. When

. . . there is no share holders’ ag ree ment, minority share holders who lack both contra ctual rig hts and voting power may have no control over how t h o s e disputes are resolved. As a g roup of law school profe ssors
. . . observe d , minority share holders in closely held corpor ations have “no statutory rig ht to exit the venture and rec eive a return of capital” like partne rs in a partne rship do, and “usually have no ability to sell their share s” like shar eholder s in a publi cly held corporation do; thus, if they fail to contra ct for share holder rig hts, they will be “uniquely subject to potential abuse by a majority or controlling share holder or g roup.” Unhappy with the situation and unable to chang e it, they are often unable to extract themselves from the business rela tionship, at least without financial loss.
Ritchie , 443 S.W .3d at 878–79 (footnotes omitted). Wit h these char acte ristics in mind, we consider
the role of the business judgme nt rule in share holder deriva tive actions broug ht on behalf of closely
held corpor ations. Then we turn to the issue of whether the business judgme nt rule impacts a share holder’s standing to a ssert a deriva tive action on behalf of a closely held corpor ation. Finally ,

we a ddress double- deriva tive standing

. A. Applicabi lity of th e Busin ess Judgme nt Rule to Closely Held Corporations
I n Texas, the business judgme nt rule protec ts corpor ate office rs and direc tors from being held
liable to the corpor ation for alleg ed brea ch of duties based on actions that are neg lige nt, unwise, inexpedient, or imprudent if the actions wer e “within the ex erc ise of t heir discretion and judgment
in the development or prosec ution of the enter prise in which their interests are involved.” Cates , 11 7

W e r e f e r t o b r e a c h o f d u t y c l a i m s g e n e r a l l y b e c a u s e t h i s c a s e d o e s n o t r e q u i r e u s t o c o n s i d e r w h i c h d u t i e s a r e 7
s u b j e c t t o t h e b u s i n e s s j u d g m e n t r u l e
. 1 0S.W

. at 849. “Dire ctors, or those acting as direc tors, owe a fiduciar y duty to the corpor ation in their
d irec torial actions, and this duty ‘includes the dedica tion of [ their] uncorr upted bus iness j u d gm en t for the sole benef

it of the corpor ation.’” Ritchie , 443 S.W .3d at 868 (quoting Int’l Banke rs Life Ins.
Co. v. Hol l o way , 368 S.W .2d 567, 577 (Tex. 1963)). The business judgme nt rule also applies to protec t the board of direc tors’ decision to pursue or forg o corpor ate cause s of action. See Cates , 11
S.W

. at 848–49; Langston v. Eagle Publ’g Co. , 719 S.W .2d 612, 616 (Tex. App.—Waco 1986, writ

re f’ d n
. r.e.) (citing Zauber v. Murray Sav. Ass’n , 591 S.W .2d 932, 936 (Tex. Civ. App.—Dall as 1979), writ ref’d n.r.e. , 601 S.W .2d 940 (Tex. 1980) (per curia m)) (“B efor e a share holder can bring

a deriva tive suit in the rig ht of a corpor ation, he must show that something bey ond unsound business judgme nt has g overne d the boar d of direc tors’ re fusal to ac t.”). Thus, the b u s i n ess judgme nt rule traditionally is implicated twice within the life cy cle of a share holder deriva tive proce eding broug ht on behalf of a corpor ation. First, the business judgme nt rule applies to the board of direc tors’ decision whether to pur sue the corpor ation’s cause of action.
See Cates , 11 S.W . at 849; Langston , 719 S.W .2d at 616–17; see also Pace v. Jordan , 999 S.W .2d 615, 623 (Tex. App.—Houston [1st Dist.] 1999, pet. denied) (“U nder the business judgme nt r ule, a share holder cannot instit ute a deriva tive suit on the corpor ation’s behalf by mere ly showing that the
b o ar d ’s ref

usal to act was unwise, inexpedient, neg lige nt, or imprudent.”). Second, the busine s s judgme nt rule applies as a d ef en s e to the merits of a share holder’s deriva tive lawsuit that asser ts claims ag ainst the corporation’s officer s or di rec tors for breac h of dut ies that result i n injury to the
corpor ation. See Cates , 11 S.W . at 848–49.

1 1T h e defe ndants urg e us to “re aff irm that the business judgme nt rule in Texas ap p l i es t o deriva tive suits broug ht on b eh al f o f all corpor ations, including closely held corpor ations.” The
defe ndants acc use the court of appea ls of “re moving the protec tions of the business judgme n t rule
from closely held corpor ations, [which] conflicts with over 100 y ear s of Texas law repr esente d by
Cates and its prog eny , not to mention e qually long- standing authority

in othe r states.” I n response , Webre contends that “Sections B throug h H [of article 5.14] provide the statute’s traditional ‘business judgme nt rule’ provisions, requiring demand, majority vote by the direc tors, and so forth.” Fur ther,
Webre ar gu es t hat the L eg islature intended to exempt closely held corpor ations from those
“re quirements and defe nses” by enac ting article 5.14(L ). At oral arg ument, both parties conc eded that the business judg ment rule a pplies in derivative pr ocee dings to the me rits of the ca se. We disag ree with the defe ndants’ chara cter ization of t he court of appe als’ opinion and find

no instance wher e it held that the business judgme nt rule is entirely inapplicable when deriva tive suits

are broug ht on behalf of closely held corpor ations. I nstead, the court of appea ls held that “sec tions (B ) throug h (H) o f ar t i cl e 5

. 14 do not apply to deriva tive suits filed on behalf of closely held
corpor ations.” 358 S.W .3d at 336. The court of appea ls distinguished Pace , which held that “to bring

a deriva tive suit in the rig ht of a corpor ation , a s h ar eh o lder must show that the board of direc tors’
ref usal to act was g overne d by something bey ond unsound business judgme nt.” Id. (quoting Pace , 999 S.W .2d at 623). Be cause Pace involved sections of article 5.14 that do not apply to closely held
corpor ations, the court of appea ls conclude d, “the rea soning in Pace , which relied on those provisions [t hat do not apply to closely held corpor ations], while applicable then and now to suits broug ht by a share holder on behalf of a corpor ation that is not closely held, does not apply to the instant litigation.”

1 2Id. at 336–37 (citing Pace , 999 S.W .2d at 623). The court of appea ls never held that t h e b u s i n es s

judgme nt rule has no applicability in deriva tive proce eding s involving closely held corpor ations. The
defe ndants’ asse rtion to the contrar y is misl eading

. Our rec ent decision in Ritchie aff irms that the business judgme nt rule applies to closely held
corpor ations. See Ritchie , 443 S.W .3d at 869. The L eg islature’s codifica tion of share holder
deriva tive proce eding p rocedures in article 5.14 did not alter how the business judgme nt rule, as

announce d in Cates , applies t o the m erits of claims ag ainst a corporation’s officer s or di rec tors for
brea ch of corpor ate duties. The business judgme n t ru l e conti nues to apply to the merits of a deriva tive proce eding , whether broug ht on behalf of a closely held corpor ation or any other

co rporation, when a corpor ation’s office rs’ or direc tors’ actions are being challeng ed. The n ex t question we must addre ss is whether the business judgme nt rule protec ts a closely held corpor ation’s
board of direc tors’ decisi o n not to pursue a corpor ate cause of action and whether a share holder plaintiff must plead and p ro v e t h at such a decision was tainted by fra ud, self-inter est, or other
wrong doing to e stablish derivative standing

. B. Th e Busin ess Judgme nt Rule and a S hareholder’s Standin g to Initiate a Der ivative P roce eding on Behalf of a Closely Held Corporat ion “Standing is a constitutional prer equisite to maintaining suit in either fede ral or state court.”
W illiams v. Lara , 52 S.W .3d 171, 178 (Tex. 2001) (citing Tex. Ass’n of Bus. v. Tex. Air Control Bd. , 852 S.W .2d 440, 444 (Tex. 1993)). Gene rally , u n l es s standing is confe rre d by statute, “a plaintiff

must demonstrate that he or she possesses an interest in a conflict distinct from that of the g ener al public, such that the defe ndant’s actions have cause d the plai n t i ff s o m e p articula r injury .” Id. at

1 3178–79 (citing Hunt v. Bass , 664 S.W .2d 323, 324 (Tex. 1984)). “The issue of standing focuse s on

whether a par ty has a suf ficient re lationship with t he lawsuit so as to have a ‘justiciable inter est’ in
its outcome .” Austin Nursing Ctr., Inc. v. Lovato , 171 S.W .3d 845, 848 (Tex. 2005)

. “The g ener al

test for standing in Texas require s that there ‘(a ) shall be a rea l controve rsy betwee n the parties, which (b) will be actua lly deter

mined by the judicial decla ration soug ht.’” Tex. Ass’n of Bus. , 852 S.W .2d at 446 (quoting Bd. of W

ater Eng’rs v. City of San Antonio , 283 S.W .2d 722, 724 (Tex. 1955)). Standing is a component of subject matter jurisdiction that courts revie w de novo. Tex. Dep’ t of Transp. v. City of Sunset Valley , 146 S.W .3d 637, 646 (Tex. 2004). A plaintiff’s lack of standing
may be challeng ed throug h a plea to the jurisdicti o n , as we l l as other proce dural device s. Bland Indep. Sch. Dist. v. Blue , 34 S.W .3d 547, 554 (Tex. 2000). “A plea to the jurisdiction challeng es the
court’s authority to decide a case .” Hec kman v. W illiamson Cnty. , 369 S.W .3d 137, 149 (Tex. 2012) (citing Bland Indep. Sc h. Dist. , 34 S.W .3d at 553–54). Rely ing on Cates , the defe ndants contend that the business judgme n t r u le “vests responsibility
for decision-making in the corpor ation’s board of direc tors and prec ludes s h areholders from disrupting the board’ s decisions throug h deriva tive actions when the b o a r d h a s d e te r

mi n e d a particula

r action is or is not in the corpor ation’s best interest.” The defe ndants asser t that the corpor ation owns the cause of action, and, under article 2.31 of the TBCA, the board of direc tors, and not share holders

or even the courts, has the power to ma nag e the corpor ation’s aff airs. I ncluded under article 2.31’s
g rant of board- only

manag ement is the sole author ity to de cide whether to pur sue the corpor ation’s leg al rig hts in litigation. The defe ndants cite Delaw are case l aw fo r the proposition that “[t] he business judgme nt rule is a threshold issue of subs tance in eve ry deriva tive suit without exception,

1 4beca

use a share holder suit is in essenc e a challeng e to the board of dir ec tors and their manag eria l
power over deriva tive litigation.” Acc ording to the defe ndants, beca use the business judgme nt rule
is substantive, it “cr eate s a presumption that the direc tors acte d lawfully in taking corpor ate actions, including ref

using to bring deriva

tive suits.” There fore , the defe ndants contend that fo r W ebre to divest the United Salt boar d’s control over the corpor ate cause of action and maintain a deriva tive suit, he must plead and prove that the board of direc tors acte d in a manner that g oes bey ond unsound
business judgme nt. To obtain standing under the defe ndants’ theory , Webre would have to plead and
prove that the board of direc tors’ failure to pursue the c orpora te ca use of a ction was “cha

rac terized by ultra vires , fra

udulent, and injurious prac tices, abuse of power , and oppression on the part of the
company or its controlling ag ency clea rly subversive of the rig hts of the minority , or of a share holder,
and which, without such interfe renc e, would leave the latter reme diless.” Ca t es , 1 1 S

. W

. at 849 (citation omitted).
Our analy sis beg ins with the statute that g overne d share holder deriv a ti v e s u it s in Texas during
the rele vant time in this case , article 5.14 of the TBCA. See T E X
. B U S
. O R G S
. C O D E § 402.014 (stating th at “p ri o r l aw” applies t o actions t hat were commenced before the m andator y application
date of the TBO C). “Ar

ticle 5.14 was adopted to prese rve the principle that a corpor ation should be

run by its board of direc tors, not a disgr untled share holder or the courts.” In re Schmitz , 285 S.W .3d 451, 459 (Tex. 2009) (citing Kamen v. Kem per Fin. Serv

s., Inc. , 500 U.S. 90, 101 (1991)). A rticle 5.14(B ) provides statutory standing for sharehold er d er i v ati ve lawsuits in most instances. I t states that “[a] share holder may not commence or maintain a deriva tive proce eding unless the share holder: (1) was a shareh o l d er o f t h e corporation at the t ime of t he act or om ission complained of

. . . ; and

1 5(2) fairly and adequa tely repr esents the interests of the corpor ation in en fo rc i n g t he rig ht of the
corpor ation.” T E X
. B U S
. C O R P
. A C T art. 5.14(B ). Moreove r, article 5.14(C) prese nts another obstacle
for a share holder plaintiff to overc ome beca use “no share holder may commence a deriva tive
proce eding until” the share holder files a written demand with the corpor ation th at ex plains the
share holder’s conce rns about th e corporation’s potential cause of action with particula rity and
reque sts the corpor ation—i.e., the board—to take suitable action. Id. art. 5.14(C)(1)

. Fur ther, article 5.14(F ) mandates that courts “shall” dismiss the share holder deriva tive lawsuit if independe nt and
d is in te r e s te d d ir ector s or a specia l investiga tion committee “dete rmines in g ood faith, a f te r c o n d u c ti n g

a rea sonable in q u iry

. . . based on the fac tors as the person or g roup deems appropr iate under the
circ umstances,” that continuing the deriva tive proce eding is not in the corpor ation’s best intere sts. Id. art. 5.14(F ); see also Crosstex Ene rgy Servs., L.P. v . Pro Plus, Inc. , 430 S.W .3d 384, 392 (Tex. 2014) (citing T E X
. G O V ’ T C O D E § 311.016(2)) (“The Code Construction Act makes clea r that the use of ‘shall’ normally imposes a mandatory require ment.”). Throug h these provisions, the L eg islature
g ave direc tors of most corpor ations the ability to exercise their business judgme nt in decidi n g w h e ther to pursue the c orpora tion’s cause s of ac tion.
I t is critica l to rec og nize, and indeed outcome determinative i n t h i s ca s e, that article 5.14’s standing , demand, and mandatory d i s m i s s al require ments do not apply to share holder deriva tive
lawsuits broug ht on behalf of closely hel d co rp o ra t i o ns. See T E X
. B U S
. C O R P
. A C T art. 5.14(L )(1) (“The prov i s i o n s o f Section B throug h H of this article are not applicable to a closely held
corpor ation.”). Thus, with respe ct to closely held corpor ations, all that rema ins is article 5.14(A)( 1)’s

rec og nition that a derivative pr ocee ding “ means a civil suit in the rig ht of a domestic c orpora tion,”

1 6and article 5.14(L )’s rec og nition that a share holder o f a cl o s ely held corpor ation may bring a

deriva tive proce eding , and, if justice require s, a court may trea t the deriva tive action as a direc t action broug ht by the share holder for his own benef it and awa

rd rec overy direc tly to the share holder or deriva tively to the corpor ation. See id. ar t

. 5

. 1 4 (A ), (L ). Read toge ther, sections (A) and (L ) of 8
article 5.14 establish that a share holder of a closely held corpor ation may bring a deriva tive
proce eding in the rig ht of the cor poration.
The defe ndants’ position, in essenc e, asks that we enfor ce the business judgme nt rule as a jurisdictional barr ier for a share holder plaintiff to asser t a deriva tive proce eding on behalf of a closely
held corpor ation. There is no such require ment in the few provisions of article 5 .14 that apply to closely held corpor ations. The defe ndants attempt to circ umvent this fac t b y c a te g orizing the business judgme nt rule as substantive, a nd they vigor ously

contend that our

decision i n Cates supports their position. Webre points out that, out s i d e o f Ca t es , the defe ndants fail to cite any rele vant Texas authority for the pr oposition t hat the business judg ment rule aff ects deriva tive standing or pre vents courts fr om exercising subje ct matter jurisdiction ove r share holder deriva tive lawsuits on behalf of closely held cor porations.
The parties ag ree that Ca t es i s the seminal case on the business judgme nt rule in Texas.
There , the Co u rt p osed a leng thy question of whether a share holder plaintiff’s alleg ations wer e sufficie nt to maintain a suit ag ainst office rs and direc tors of a corpor ation for fra udulent prac tices and

A f u r t h e r a s p e c t o f

a r t i c l e 5

. 1 4 r e m a i n s , d e s p i t e s e c t i o n ( L )

. W h e n a d e r i v a t i v e p r o c e e d i n g i s t e r m i n a t e d , t h e 8
c o u r t m a y o r d e r “ t h e p l a i n t i f f t o p a y t h e e x p e n s e s o f

t h e
. . . c o r p o r a t i o n o r a n y d e f e n d a n t i n c u r r e d i n i n v e s t i g a t i n g a n d d e f e n d i n g t h e p r o c e e d i n g i f i t f i n d s t h a t t h e p r o c e e d i n g w a s c o m m e n c e d o r m a i n t a i n e d w i t h o u t r e a s o n a b l e c a u s e o r f o r a n i m p r o p e r p u r p o s e
. ” I d

. a r t

. 5

. 1 4 ( J ) ( 1 ) ( b )

. 1 7misapplication of corpor ate assets that alleg edly cause d the share holder t o s u ffe r loss beca use the
value of his stock depre ciated and the corpor ation had actua lly or virtually ref used to sue on its own behalf

. Cates , 11 S.W

. at 848. After rec og nizi ng that the rules supplied by the preva iling authorities
at the time wer e “not a ltoge ther re concilable in this class of case s,” the Court explained:
I t may be safe ly said that courts of equity have not, as a g ener al rule, been disposed to e x erc ise their jurisdiction throug h suits like the prese nt to control or interfe re in the manag ement of the corpor ate or i n terna l aff airs of an incorporated company
. The company ’s business is left to t h e direc tion of the office rs or manag ing board which, by the law cre ating it, may b e clothed with the power and discretion to conduct its aff

airs in the manner which, in their judgme nt, is best calc ulated to promote its interests. To justify the interposition of the courts there must ex ist, as a foundation for such suit, some action,—a thr eate ned action of such board or office rs which is bey ond the power confe rre d by its char ter,—or such fr au d ulent transac tion completed, contemplated among themselves , or with others, as will result in serious injury

to the stockholders suing

. Id

. I n Cates , the Court announce d three require ments that wer e “re g arde d as indispensable as the
basis for such a [shareholder deriva tive] suit: The company must ref use to sue; there must be a brea ch
of duty ; there must be injury to the stockholder.” Id. at 849 (citation omitted). The L eg islature later
codified these require ments in article 5.14 of the TBCA. See Act of May 26, 1973, 63rd L eg ., R.S.,
ch. 545, § 37, 1973 Tex. Gen. L aws 14 8 6 , 1 508–09, amende d by Act of May 13, 1997, 75th L eg ., R.S., ch. 375, § 30, 1997 Tex. Gen. L aws 1517, 1540–43 (expired J anuar y 1, 2010). Wit h respe ct to
corpor ate law, we have previously rec og nized that when the L eg islature codifies co m m o n law
corpor ate principles, “[t] he eff ect of these statutes was to supplant the equitable [common law] theory by decla ring a statutory equivalent.” Hunter v. Fort W orth Capital Corp. , 620 S.W .2d 547, 550 (Tex. 1981). Be cause the L eg islature is never presumed to do a useless act, we have held that the enac tment

1 8of a common law equitable theory into the TBCA “bar s resor t to the [equitable] theory as i t exis ts
apar t from the statute.” Id. at 551. Thus, it is noteworthy that a share holder’s rig ht to sue on behalf
of a corpor ation was “historically an equitable matter.” Ross v. Bernhard , 396 U.S. 531, 538 (1970);
Cohen v. Bene

ficial Indus. Loan C o r

p. , 337 U.S. 541, 548 (1949) (discussing the backg round of

s hare holder deriva tive actions and rec og nizi ng that “[e]quit y came to the relief of the stockholder,
who had no standing to bring [a] civi l ac t i o n at l aw ag ainst faithless di rec tors and manag ers” ); see also Cates , 11 S.W . at 848–49 (discussing the equitable nature of sha reholde r der ivative ac tions). Quite simply , by virtue of Article 5.14, the L eg islature codified a share holder’s rig ht to bring

a deriva tive proce eding on behalf of a closely held corpor ation. Cf. W illiams , 52 S.W .3d at 178–79 (re cog nizi ng that standing can be confe rre d by statute). I n doing so, the L eg islature did not require
share holders of a closely held corpor ation to establish deriva tive standing by pleading or proving that
the direc tors failed to exercise their honest business judgme nt in not pursuing the corpor ate cause of
action. I n fac t, as discussed, the L eg islature remove d barr iers that could pr event a share holder of a closely held corpor ation from asser ting a deriva tive lawsuit. See T E X
. B U S
. C O R P
. A C T art. 5.14(L ); cf. Ritchie , 443 S.W .3d at 864 n.8 (“Closely held corpor ations have unique attributes that may justify
differ ent protections under the law.”)

. Remarka bly , the L eg islature even removed the requirement
that a share holder in a closely held corpor ation meet the standing require ment of article 5.14(B ) that “[a] share holder may not commence or maintain a d er i v at ive proce eding unless the
share holder

. . . fairly and adequately repr esents the interests of the corpor ation in enfor cing the rig ht
of the corpor ation.” T E X
. B U S
. C O R P
. A C T art. 5.14(B ). “When the L eg islature includes a rig ht or

reme dy in one part of a code but omit s i t i n an o t h er, that may be prec isely what the L eg islature

1 9intended,” and “we must honor that differ ence .” PPG Indu s
. , Inc. v. JMB/Houston Ctrs. Partners Ltd.

P’ship , 146 S.W .3d 79, 84 (Tex. 2004) (citations omitted). Moreov er, “[a]s we consider exis ting

statu t o ry re medies, we are mindful of the principle that, when the L eg islature has enac ted a
compre hensive statutory scheme , we will ref rain from imposing additional claims or proce dures that
may upset the L eg islature’s ca re fu l b alanc e of policies and interests.” Ritchie , 443 S.W .3d at 880 (citing Liberty Mut. Ins. Co. v. Adcoc k , 412 S.W .3d 492, 493 (Tex. 2013)).
The Court’s discussion in Cates about the nece ssity of a share holder re q u est ing that the
corpor ation bring suit to enfor ce its rig hts was a prec ursor to wha t is now commonl y known as the
demand require ment, which was later codified in article 5.14(C ). See T E X
. B U S
. C O R P
. A C T art. 5.14(C). This Court has pre viously discussed the statutory

history of the de mand re quirement:
The contours of the demand require ment i n Texas law have alway s been somewhat unclea

r, in part beca

use share holder deriva tive suits have been rela tively rar e. The original 1941 rules of civ i l p roce dure imposed a demand require ment in deriva tive suits, but that provision was repe aled four months after it beca me eff ective. I t r eappe are d in 1973 in a rticle 5.14 of the [TBCA], which require d that an initial pleading state “[w]it h particula rity , the ef

forts of the plaintiff to have suit broug ht for the c orpora tion by the boar d of direc tors, or the rea sons f or not making any such ef forts.”
I n 1997, the L eg islature ex tensively revised the [TBCA] “to p ro vide Tex as with modern and flexibl e business laws which should make Texas a more attrac tive jurisdiction in which to incorporate.” I ncluded wer e chang es to article 5.14 to confor m Texas deriva tive actions to the Model Business Corporat i o n Act. Article 5.14(C) now provides that “[n] o share holder may commence a deriva tive proce eding until

. . . a written demand is filed with the corpor ation setting forth with particula rity the act, omission, or other matter that is the subject of the claim or challeng e and reque sting that the corpor ation take suitable action.” Unlike Texas law for a centur y befor e, the new provision require s presuit demand in all case s; a share holder can no longe r avoid a

demand by

proving it would have bee n futile.

2 0In re Sc hmitz , 285 S.W .3d at 454–55 (footnotes and citations omitted). I t has bee n rec og nized that

the demand require ment overla ps with the business judgme nt rule, at least with respe ct to the board
of direc tors’ decision to pursue the corpor ation’s cause s of action. See Kamen , 500 U.S. at 96 (“The
purpose of the demand require ment is to aff or[d] the direc tors an opportunity to exercise their

rea sonable business judg ment and wa ive a leg al rig ht vested in the cor poration in the belief

that its best interests will be promoted by not insist ing on suc h rig ht.”) (quota tions omi tted). 9
But this statutory demand require ment does not apply to share holder deriva tive proce eding s broug ht on behalf of closely held corpor ations. See T E X
. B U S
. C O R P
. A C T art. 5.14(L ). We must g ive meaning to the L eg islature’s remova l of the demand require ment in de rivative proce eding s broug ht

on behalf of closely held corpor ations. See Hunter , 620 S.W .2d at 551 (“[T]he [L ]egislature is never presumed to do a useless act.” ). I n other words, the demand require ment is excused in all instances
in which a sha

reholde r asse rts a der ivative proc eeding on behalf of a closely held cor poration. See
T E X
. B U S
. C O R P
. A C T art. 5.14(L ).
The United States Supreme Court has acc urate ly rec og nized that “the contours of the demand require ment—when it i s require d, and when excused—deter mine who has the power to control
corpor ate lit igation.” Kamen , 500 U.S. at 101. “[ T]he demand re quirement implements ‘the ba sic

S e e a l s o B r y a n S t a n f

i e l d , C o m m e n t , F o r B e t t e r o r f o r W o r s e ? : M a r r i a g e o

f t h e T e x a s a n d M o d e l B u s i n e s s 9 C o r p o r a t i o n A c t s ’ D e r i v a t i v e A c t i o n S t a t u t e s a n d W h a t I t M e a n s f

o r C o r p o r a t i o n s , 3 5 T E X
. T E C H L

. R E V
. 3 4 7 , 3 5 9 n
. 1 1 9 ( 2 0 0 4 ) ( “ D e m a n d w a s r e q u i r e d t o g i v e d i r e c t o r s t h e o p p o r t u n i t y t o u s e b u s i n e s s j u d g m e n t f o r t h e c o r p o r a t i o n ’ s b e s t i n t e r e s t s , s e r v e t h e g o a l o f j u d i c i a l e c o n o m y b y a l l o w i n g a c o r p o r a t i o n t o p u r s u e n o n - j u d i c i a l r e m e d i e s , a n d d i s c o u r a g e

‘ s t r i k e s u i t s , ’ w h i c h a r e i n t e n d e d o n l y t o b e n e f i t a s h a r e h o l d e r
. ” ) ( c i t i n g R o b e r t K

. W i s e , D e m a n d F u t i l i t y i n S h a r e h o l d e r - D e r i v a t i v e L i t i g a t i o n U n d e r T e x a s L a w , 2 8 T E X
. T E C H L

. R E V
. 5 9 , 6 6 ( 1 9 9 7 ) ( r e c o g n i z i n g t h a t t h e p u r p o s e o f t h e d e m a n d r e q u i r e m e n t “ a d v a n c e s t h e f u n d a m e n t a l p r i n c i p l e o f c o r p o r a t e l a w t h a t t h e b u s i n e s s a n d a f f a i r s o f a c o r p o r a t i o n , i n c l u d i n g d e c i s i o n s r e g a r d i n g w h e t h e r a p a r t i c u l a r c l a i m s h o u l d b e l i t i g a t e d , a r e m a n a g e d b y d i r e c t o r s , r a t h e r t h a n b y s h a r e h o l d e r s , ” a n d t h a t t h e d e m a n d r e q u i r e m e n t p r o v i d e s d i r e c t o r s a n o p p o r t u n i t y t o e x e r c i s e t h e i r b u s i n e s s j u d g m e n t i n d e c i d i n g w h e t h e r e n f o r c i n g t h e c o r p o r a t i o n ’ s r i g h t s i n l i t i g a t i o n i s i n t h e c o r p o r a t i o n ’ s b e s t i n t e r e s t s )

.

2 1principle of corpor ate g overna nce that t h e decisions of a corpor ation—including the decision to initiate litigation—should be made by the board of direc tors or the majority of share holders.’” Id. (quot ing Daily Incom e Fund, Inc. v. Fox , 464 U.S. 523, 530 (1984))

. But when the demand require ment is excused, such as whe n i t i s no longe r require d by statute, the board of direc tors’
“business judgme nt bec[omes] irrele vant to the plaintiffs’ standing , for it never [i s] consulted.” Clark
v. L omas & N

ett leton Fin. Corp. , 625 F.2d 49, 53–54 (5th Cir. 1980); accord Zauber , 591 S.W .2d

at 939 (re cog nizi ng that when a d em an d i s not require d, a share holder may maintain a deriva tive
action despite the fac t that the board of direc tors voted not to pursue t h e co rp o ra t i on’s cause of action). “Or dinarily , it is only when demand is excused that the share holder enjoy s the rig ht to initiate
suit on behalf of his corpor ation i n disreg ard of the direc tors’ wishes.” Kamen , 500 U.S. at 96 (quot at i o n o m itted). We hold that by removing the demand require ment, the L eg islature g ave share holders of closely held corpor ations the rig ht to pursue corpor ate cause s of action deriva tively
without interfer ence from the boa rd of dire ctors. Under the same rea soning, we hold that by removing the mandatory di s missal require ment with respe ct to closely held corpor ations, the L eg islature rem o ved the ability for disinterested and
in d e p e n d e n t d ir e c to r s o r a s p ecia l investiga tion committee to decide whether continuing the deriva ti v e
proce eding is in the best interest of the corpor ation. See T E X
. B U S
. C O R P
. A C T art. 5

. 1 4 (F ), (L).
Be cause the L eg islature ex ce p t ed closely held corpor ations from this mandatory dismiss al require ment, we de cline the de fenda nts’ reque st to reinstate it in an alterna tive form.
I n a simil ar vein, we ad d re ss the defe ndants’ contention that to divest a closely held
corpor ation’s owner ship of a cause of action, a share holder plaintiff must plead and prove that the

2 2board o f d i re ct o r members wer e not disinterested or acte d fra udulently in declining to pursue the
corpor ation’s cause of action. This contention mi mics the “de mand futility ” exception from Cates
that was codified in the pre- 1997 version of article 5.14 but was later eliminated. See In re Schmitz , 285 S.W .3d at 455. Under the pre- 1997 v er s i o n of the TBCA, “[t] he demand require ment was excused only when d em an d wa s deeme d to be futile, which occur red when the board of direc tors lacke d impartiality in ma

king a business decision on whether to instit ute a suit on the corpor ation’s
b eh alf.” Stanfield, supra note 8, at 359 (citing Wis e, supra note 8, at 71–72) (“D emand will b e excused when the role of the direc tors in the challeng ed conduct, or the alleg ed domination or control
of the direc tors by the alleg ed wrong doers, is suc h that demand would be ‘futile.’” ); see also Act of May 26, 1973, 63rd L eg ., R.S., ch. 545, § 37, 1973 Tex. Gen. L aws 1486, 1508–09 (ame nded 1997) (expired J anuar

y 1, 2010) (allowing for derivative share holder plaintiffs to plea d demand f utilit y ).
Some c ourts rea soned that the demand futility require ment was “not mere ly an informal proce dural step, but rather

a re quirement ne cessitating proof a t trial.” E.g. , Zauber , 591 S.W .2d at 938.
I n essenc e, the defe ndants ask us to resur rec t the demand futility require ment, not simply as

a proce dural hurdle, but as an element of a share holder’s standing to pursue a deriva tive proce eding
on behalf of a c losely

held cor poration. Ag ain, we de cline this invitation t o add a r equire ment that

t h e L egislature has intentionally omitted. Under the post-1997 version of article 5.14 that i s 1 0

I n a n y e v e n t , u n d e r t h e p r e - 1 9 9 7 v e r s i o n o f a r t i c l e 5

. 1 4 , s p e c i a l e x c e p t i o n s

— a n d n o t a p l e a t o t h e 10 j u r i s d i c t i o n

— w e r e t h e a p p r o p r i a t e v e h i c l e t o a d d r e s s a s h a r e h o l d e r p l a i n t i f f ’ s f a i l u r e t o p l e a d w i t h p a r t i c u l a r i t y r e a s o n s w h y c o m p l y i n g w i t h t h e d e m a n d r e q u i r e m e n t w o u l d h a v e b e e n f u t i l e
. S e e W i n g a t e v
. H a j d i k , 7 9 5 S

. W

. 2 d 7 1 7 , 7 1 8

– 2 0 ( T e x
. 1 9 9 0 ) ; D o d s o n v
. K u n g , 7 1 7 S

. W

. 2 d 3 8 5 , 3 9 0 ( T e x
. A p p
. — H o u s t o n [ 1 4 t h D i s t

. ] 1 9 8 6 , w r i t r e f ’ d n
. r
. e
. ) ; Z a u b e r , 5 9 1 S

. W

. 2 d a t 9 3 8 ( “ I f t h e p l e a d i n g s d o n o t i n c l u d e s p e c i f i c f a c t s a n d p a r t i c u l a r i z e d r e a s o n s f o r f a i l i n g t o m a k e d e m a n d , t h e c a s e i s s u b j e c t t o b e i n g d i s m i s s e d u p o n p r o p e r e x c e p t i o n a n d a f t e r o p p o r t u n i t y t o a m e n d

. ” )

. 2 3applicable here , see Act of May 13, 1997, 75th L eg ., R.S., ch. 375, § 30, 1997 Tex. Gen. L aws 1516,

1540–43 (expired J anuar

y 1, 2010), a share holder o f a cl o sely held corpor ation is not require d to make a demand as a prer equisite to asser ting a deriva

tive suit, much less establish that m ak i n g a demand would be futile. See T E X
. B U S
. C O R P
. A C T art. 5.14(L ). Turning our attention back to Cates , there the Court examined the other two elements for a share holder t o as s er t a derivative action ag ainst a corporation’s officer s or di rec tors: “Such breac h
of duty by the direc tors or office rs of the company , and such injury to the plaintiff’s stock, essential

to maintain the action.” Cates , 11 S.W

. at 849. Wit h reg ard to the bre ac h of duty element, the 1 1
element at issue here , the Court explained that courts will not interfe re with the office rs or direc tors
in control of the corpor ation’s aff airs based on alleg ations of mere mismanag ement, neg lect, or abuse
of discretion. Id

. I n contra st, an office r or direc tor’s brea ch of duty that would authorize court interfe renc e “is that which is c hara cter ized by ultra vires , fra udulent, and injurious pr actice s, abuse
of power , and oppre ssion on the part of the company or its c ontrolling ag ency clea rly subversive of
the rig hts of the minority , or of a share holder, and which, without such interfe renc e, would leave the
latter reme diless.” Id. (citations omitted). The defe ndants also rely on this part of Cates —the discussion pe rtaining to the require ment that a plaintiff plead a brea ch of duty that would authorize

a cour t to take ac tion—as supportive of their standing arg ument.

T h e C o u r t h e l d t h a t t h e i n j u r y r e q u i r e m e n t w a s n o t m e t b e c a u s e “ t h e p e t i t i o n [ d i d ] n o t a l l e g e s u c h f a c t s a s 11
w o u l d a u t h o r i z e t h e s u i t b y p l a i n t i f f , a s a n i n d i v i d u a l s t o c k h o l d e r , a g a i n s t t h e c o m p a n y f o r d a m a g e s i n t h e d e p r e c i a t i o n o f t h e v a l u e o f h i s s t o c k , a n d i n j u r y t o t h e c o r p o r a t e p r o p e r t y
. ” C a t e s , 1 1 S

. W

. a t 8 5 0 ( c i t i n g E v a n s v
. B r a n d o n , 5 3 T e x
. 5 6 , 6 0 ( 1 8 8 0 ) )

. A c c o r d i n g l y , t h e C a t e s h o l d i n g w a s t h a t t h e t r i a l c o u r t c o r r e c t l y g r a n t e d t h e d e f e n d a n t s ’ s p e c i a l
e x c e p t i o n s a n d d i d n o t e r r i n d i s m i s s i n g t h e c a s e w h e n t h e p l a i n t i f f d e c l i n e d t o a m e n d h i s p e t i t i o n
. S e e i d

. a t 8 4 6 , 8 5 0

. H e r e , i n c o n t r a s t , W e b r e d e r i v a t i v e l y a s s e r t e d a n i n j u r y o n b e h a l f o f t h e c o r p o r a t i o n t h a t t h e d e f e n d a n t s ’ w r o n g f

u l
c o n d u c t d i m i n i s h e d i t s a s s e t s , w h i c h d e c r e a s e d t h e v a l u e o f W e b r e ’ s s h a r e s
. T h i s e n d s o u r i n q u i r y i n t o t h e i n j u r y c o m p o n e n t o f d e r i v a t i v e s t a n d i n g
. 2 4The defe ndants confuse standing with an issue that g oes to the merits. Ultimately , the Court 1 2
in Cates conclude d “that [t he] char acte r of fra udulent prac tices, oppressive conduct, abuse of power , and an illega l exercise of discretion subversive of the plaintiff’s rig hts [was] not shown on the part of the office rs and direc tors of the company which are held to be nece ssary to maintain a suit of this
kind.” Id. (empha sis added)

. This emphasiz ed lang uag e is instructive beca use “[t] he rig ht of a plaintiff to maintain a suit , while fre quently trea ted as g oing to the question of jurisdiction, has been
said to g o in rea lity to the rig ht of the plaintiff to relief rathe r than to the jurisdiction of the court to aff ord it.” Dubai Petroleum Co. v. Kazi , 12 S.W .3d 71, 76–77 (Tex

. 2000) (empha sis added) (quotation omitted). This statement in Dubai square ly applies t o t h e discussion of “cour t interfe renc e” in Cates

. We rec og nized in Dubai that “[t] he classifica t i o n o f a m at t er as one of [subj ect- matter] jurisdiction,” such as the defe ndants’ standing arg ument h er e, “o p ens the way to making judgme nts vulnera ble to delay ed attack for a varie ty of irreg ula r it ie s th at perha

ps better oug ht

to be seale d in a judgme nt.” Id. at 76 (quoting R E S T A T E M E N T (S E C O N D ) O F J U D G M E N T S § 12 cmt. b (1982))

. “I t is pref

era ble t o ‘avoid a result t hat l eave s the decisions an d judgme nts of [ a tribunal]
in limbo and subject to future attack, unle ss that was the L eg islature’s c lear intent.’” In re United
Servs. Auto. Ass’n , 307 S.W .3d 299, 310 (Tex. 2010) (quoting City of DeSoto v. W

hite , 288 S.W .3d
3 8 9 , 394 (Tex. 2009)). This Court has adopted “an approa ch to jurisdictional questions desi gn ed

to streng then finality and reduc e the possibili ty of delay ed attacks on judgme nts, reg ardle ss of

T h i s c o n f

u s i o n i s u n d e r s t a n d a b l e
. I t h a s b e e n o b s e r v e d t h a t “ ‘ [ s ] t a n d i n g ’ i n t h e c o n t e x t o f d e r i v a t i v e a c t i o n s 12 i s n o t t o b e c o n f

u s e d w i t h i t s m o r e t r a d i t i o n a l m e a n i n g a s d e f i n i n g w h e n a n i n d i v i d u a l c a n c h a l l e n g e g o v e r n m e n t a l
a c t i o n
. ” D a n i e l R

. F i s c h e l , N o t e , T h e D e m a n d a n d S t a n d i n g R e q u i r e m e n t s i n S t o c k h o l d e r D e r i v a t i v e A c t i o n s , 4 4 U

. C H I
. L

. R E V
. 1 6 8 , 1 6 8 n
. 5 ( 1 9 7 6 )

. “ A s u s e d i n t h e [ s h a r e h o l d e r d e r i v a t i v e ] c o n t e x t , s t a n d i n g d e f i n e s w h e n m i n o r i t y s h a r e h o l d e r s c a n s u e d e s p i t e t h e o p p o s i t i o n o f t h e b o a r d o f d i r e c t o r s o r a m a j o r i t y o f t h e s h a r e h o l d e r s
. ” I d

. 2 5whether the claim was a nchore d in c ommon law or was a specia lly -cr eate d statutory action.” City of DeSoto , 288 S.W .3d at 394 (citation omitted); accord In re United Servs. Auto. Ass’n , 307 S.W .3d
at 311.
Acc ording ly , the pronounce ment of the business judgme nt rule in Cat es , wi t h respe ct to brea ches of

duty , g oes “in re ality

to the rig ht of the plaintiff to re lief ra ther than to the jurisdiction
of the court to aff

ord it.” See Dubai Petroleum Co. , 12 S.W .3d at 76–77 (quotation omitted). I t is
insufficient for a share holder plaintiff to alleg e a deriva tive rig ht to relief ag ainst a corpor ation’s
office rs or direc tors for breac h of a duty based upon “ mere mismanag ement or ne g lect . . . , or t he
abuse of discretion lodged i n t h em i n t h e conduct of the company ’s bus iness.” Cates , 11 S.W

. at
849. Such alleg ations may be disposed of on specia l exceptions or sum mary judgme nt. But the 1 3
Cates statement that “unwise or inexpedient” acts would not “author ize the interfe renc e by the courts
at the suit of a stockholder” is better understood, under Dubai and its prog eny , as perta ining to what

a share holder plaintiff must plead and prove to establish a deriva tive rig ht to relief on behalf of the closely held corpor ation—not to e stablish standing to invoke a court’s subject matter jurisdiction.
I f a share holder deriva tive plaintiff can establish a brea ch of duty , “the courts will aff ord a reme dy .”
See P atton v. Nicholas , 279 S.W .2d 848, 854 (Tex. 1955); accord Ritchie , 443 S.W .3d at 885. Today ’s decision follows our rec en t o p i n ion in Ritchie

. I n Ritchie , while discussing the

succe ssor statute to article 5.14, we rec og nized that “the L eg i s l at u re has enac ted specia l rules to allow its shar eholder s to more easily bring a deriva tive suit on behalf of the corpor ation.” Ritchie ,

T h e d e f e n d a n t s a l s o f

i l e d p l e a s i n a b a t e m e n t , s p e c i a l e x c e p t i o n s , a n d m o t i o n s f o r s u m m a r y j u d g m e n t i n t h i s 13
c a s e
. T h e t r i a l c o u r t m a y c o n s i d e r t h o s e m a t t e r s o n r e m a n d

. 2 6443 S.W .3d at 880–81 (empha sis added) (citing T E X
. B U S
. O R G S
. C O D E § 21.563). This leg islatively

imposed ease of court acc essibility enable s s h ar eh olders of closely held corpor ations to bring
deriva tive actions “without having to prove that they ‘fa irly and adequately repr esent[] the interests
of’ the corpor ation, without having to make a ‘dema nd’ upon the corpor ation, as in other deriva tive actions, and without fea

r of a stay or dismiss al based on actions of other corpor ate actor s in response
to a demand.” Id. (citations o m i t ted). Despite the L eg islature’s removal of these im pediments to promote g rea ter court acc essibility for share holders of closely held corpor ations, the defe ndants
propose an additional judicially cre ated barr i er
. As we stated in Ritchie , “we will ref rain from imposing additional claims or proce dures that may upset the L eg islature’s car eful balanc e of policies
and interests.” Id. at 880 (citat i o n omitted). We emphasized in Ritchie the availability of the
share holder deriva tive action and o t h er ex i s ting reme dies in the closely held corpor ation context, which re fl ec t ed a car eful balanc e of leg islative policy judgme nts that made it unnece ssary to

rec og nize a new common law claim for share holder oppression. S ee generally id. at 876–91.
Followin g t h is rea soning, we decline to impose extra-statutory barr iers to share holder deriva tive
lawsuits in the closely held corpor ation context so such lawsuits can provide the protec tions that the
L eg islature intended. See id.
Not only does today ’s decision alig n with Cates and Ritchie , but our holding is also
consistent with this Court’s other jurisprudenc e on share holder lawsuits. The d ef en d ants rely on

sever al statements from Massachusetts v. Davis , 168 S.W .2d 216 (Tex. 1942), and W in g a t e v. Hajdik , 795 S.W .2d 717 (Tex. 1990), reg arding the unavailability of direc t share holder rec overy for injuries to the corpor ation. Both case s stand for the proposition that share holders have no individual

2 7or direc t claims for injuries to the corpor ation. See W ingate , 795 S.W .2d at 719; Davis , 168 S.W .2d

at 221. These holdings are ref lected in our statutes. Under article 5.14(L ), there is not an absolute rig ht for a share holder to r ecove r direc tly for claims based on corpor ate injuries. Rathe r, if justice require s, a court may trea t a deriva tive proce eding like a direc t a ction and allow the share holder to

rec over direc tly

. T E X
. B U S
. C O R P
. A C T art. 5.14(L ). But the proce eding still must be deriva tive. See
id. ; Swank v. Cunningham , 258 S.W .3d 647, 665 (Tex. App.—Eastland 2008, pet. denied) (“A trial
court’s decision to trea t an action as a direc t action

. . . so as to allow rec overy to be paid direc tly to a shareholder plaintiff, as opposed t o the corporation, does not mean that the a ction is no longe r a deriva tive proce eding .”). I n W ingate , the Court simply held that a share holder may stil l re cover damag es “for wrongs done to him individually ‘whe re t h e wrong doer violates a duty arising from

contra ct or otherwise, and owing direc tly by him to the stockholder.’ ” 795 S.W .2d at 719 (quoting
Davis , 168 S.W .2d at 222). But to r ecove r in a n individual c apac ity for non-der ivative claims, the
share holder “ must prove a pe rsonal ca use of a ction and per sonal injury .” Id.
Fur ther, the case of Pledger v. Schoellkopf , 762 S.W .2d 145 (Tex. 1988) (per curia m), which
the defe ndants rely upon in support of their standing arg ument, is not inconsistent with our holding today

. Pledger involved a share holder’s cross-c laim ag ainst fellow share holders for fra ud, tortious
interfe renc e with busine ss r elationships, a nd materia l misre prese ntations. Id. at 145. The court of
appea ls reve rsed a jury verdic t that was in the plaintiff’s favor beca use the cause s of action belong ed

to the corpor ation and the plaintiff and cross-de fenda nts wer e its share holders. Id. This Court held
that the share holder plaintiff was entitled to rec over beca use the cross-de fenda

nts waived their rig ht

to complain about the capa city in which the share holder plaintiff sued them b y fa iling to file a

2 8verifie d denial under Texas Rule of Civil Procedur e 93(2). Id. at 146. “When capa city is contested,

Rule 93(2) re quires that a verifie d plea be filed any time the rec ord does not aff irmatively
demonstrate the plaintiff’s or defe ndant’s rig ht to bring suit or b e sued in whatever capa city he is suing.” Id. (citing T E X
. R. C I V
. P. 93(2))

. The Court did not addre ss whether a share holder plaintiff’s pleading s must overc ome the business judgme nt rule to sue on behalf of a corpor ation in

a re prese ntative ca

pacity

. Finally , as Webre points out, our decision in Eye Site, Inc. v. Blackburn , 7 9 6 S

. W

. 2 d 160 (Tex. 1990) , cuts ag ainst the defe ndants’ position. At the outset of that opinion, the Court made a point to “conf

irm that the complaints raised by [t he share holder plaintiff] belong exclusively to [t he
corpor ation].” Id. at 161. At that time, the Texas Rules of Civil Procedur e contained a require ment that “[t] he derivative sui t may not be maintained if it appea rs t hat t he plaint i ff d o es n o t fairly and adequately repr esent the interests of the share holders simil arly situated in enfor cing the rig ht of the
corpor ation.” Id. (quoting former T E X
. R. C I V
. P. 42(a) (1940, amende d 2003)). We noted that this
proce dural rule was patterne d afte r Fe dera l Rule of Civil Procedur e 23.1, “which is desig ned to
preve nt share holders from interfe ring with leg itimate discretion in corpor ate g overna nce and suing
in place of the corpor ation wher e doing so disserves the leg itimate interests of the corpor ation or its
share holders.” Id. (citing Daily Incom e Fund, Inc. , 464 U.S. at 531–32 & n.7). The Court conclude d
that “[t] he literal terms of [t he former Texas Rule of Civil Procedur e] and th e n ee d t o provide a

reme dy in instances of corpor ate misconduct convince us that we cannot prec lude the sole dissenting
shar eh o l d er in a close corpor ation from enfor cing the rig ht of the corpor ation.” Id. at 162. The
Court observe d th at the share holder plaintiff was in a unique position “[a]s the sole minority

2 9share holder repr esenting the corpor ation ag ainst all other s h areholders,

. . . and his interests

differ [ed] from those of the rema ining share holders.” Id. at 163. The Court held that the share holder plaintiff was “in compliance wi t h o u r co rpora tion laws and our deriva tive action rule, and he has standing to pursue the c orpora tion’s claim.” Id.
Acc ording ly , we reaffirm that when a share holder of a closely held corpor ation bring s a deriva tive proce eding “in compliance with our corpor ation laws and our deriva tive action rule,

. . . he
has standing to pursue the corpor ation’s claim.” Id. Throug h sections (B ) t hroug h (H) of article 5.14, the L eg islature has g iven direc tors of publicly trade d corpor ations the ability to exercise their
business judgme nt in handling the corpor ati o n ’s l egal disputes. See T E X
. B U S
. C O R P
. A C T art. 5.14(B )–(H)

. By virtue of article 5.14(L ), closely held corpor ations do not have the same defe renc e
to their boards of di rec tors’ decision-making with respe ct t o pursuing corpor ate causes of acti o n
. See id. art 5.14(L ). When a closely held corpor ation is injured, and such an i n jury decr ease s the
value of it s s hare s, its share holders have standing to pursue the corpor ation’s cause s of action
deriva tively

. Thus, courts have j urisdiction to decide share ho l d er derivative lit iga tion broug ht on behalf of closely held corpor ations, and it is immaterial whether the board of direc tors approve s or disapproves of the deriva tive litigation. The court of appea ls pr operly conclude d that the business judgme nt rule does not depr ive Webre of standing to assert a deriva tive proce eding on behalf of a closely held cor poration in this case. See 358 S.W .3d at 335–37.

C. Double-Der ivative Standin g We next addr es s wh ether the court of appea ls err ed in rec og nizi ng the conce pt of doublederiva tive standing

. “I

n a ‘double deriva tive’ action, the share holder is eff ectively maintaining the

3 0deriva tive action on behalf of the subsidiary , based upon the fac t that the pare nt or holding company

has deriva tive rig hts to the cause of action possessed by the subsidiary .” Blasband v. Rales , 971 F.2d 1034, 1043 (3rd Cir. 1992) ( quoting 13 C H A R L E S R.P. K E A T I N G , G A I L A. O’G R A D N E Y , F L E T C H E R C Y C L O P E D I A O F T H E L A W O F C O R P O R A T I O N S § 5977 (re v. ed. 1991)). Texas United is the sole
share holder of U nited Salt. W ebre asser ts that he has standing to bring a der ivative suit on behalf
of United Salt beca

use he is a share holder of United Salt’s only share holder, which prov i d es him
with a benef

icial or equitable owner s h i p i n tere st in United Salt under the rea soning of Roadside Stations, Inc. v. 7HBF, Ltd. , 904 S.W .2d 927 (Tex. App.—For t Worth 1995, no writ). The
defe ndants contend that only the actua l share holder of a corpor ation can bring a deriva tive suit in that
corpor ation’s name, a

nd that the definition of a share holder in the TBCA includes only “shar eholder s of the corpor ation wh o s e cause of action he or she purports to prosec ute.” The court of appea ls
ag ree d with Webre that, under the rea soning set out in Roadside , “Webre , as a stockholder in Texas United, is also an equitable owner of stock in United Salt beca use Texas United owns all of the stock
in United Salt.” 358 S.W .3d at 333 (citing Roadside Stations, Inc. , 904 S.W .2d at 931). We ag ree with Webre and the court of a ppeals.
I n the TBCA, a share holder is define d to mean “the person in whose name share s issued by

a corpor ation are reg istered at the re l ev an t time in the share transfe r rec ords maintained by the
corpor ation.” T E X
. B U S
. C O R P
. A C T art. 1.02(A)( 22). I n the “De rivative Procee dings” provisions,
article 5.14(A)( 2) defines a shareholder : “‘Shar eholder ’ includes a beneficia l owner w hose shar es

are h el d i n a voting trust or by a nominee on the benef icial owner ’s behalf

.” Id. art. 5.14(A)( 2) (empha sis added)

. Under the Code Construction Act, “‘[i] ncludes’ and ‘including ’ are terms of

3 1enlar g ement and not of limit ation or exclusive e numera tion, a nd use of the terms does not c rea te a presumption that components not expressed ar e excluded.” T E X
. G O V ’ T C O D E § 311.005(13). Turning to Roadside , which Webre relies upon f or its rec og nition of equitable owne rship,

t h er e t h e co urt addre ssed a question of first impression of “whe ther a stockholder in the pare n t
company can bring a suit on behalf of a subsidiary .” Roadside Stations, Inc. , 904 S.W .2d at 930.
At that time, the pre- 1997 version of the TBCA stated that a deriva tive suit may be broug ht if “[t] he plaintiff was a rec ord or benef icial owner of share s
. . . at the time of the trans ac t i o n o f wh i ch he complains.” Id. (citing the pre-1997 version of T E X
. B U S
. C O R P
. A C T art. 5.14(B )(1) , Act of May 26, 1973, 63rd L eg ., R.S., ch. 545, § 37, 1973 Tex. Gen. L aws 1 4 8 6 , 1 5 0 8

– 0 9 (amended 1997) (expired J anuar

y 1, 2010)). The court ultimately answe red the question by holding:
Stockholders of a corpor ation are the equitable owner s o f the assets of the corpor ation. Consequently , 7HB F, as a stockholder with a fifty perc ent interest in Nu–Way , I nc. , al s o i s an equitable owner of fifty perc ent of the stock of Nu–Way Distributi n g C o
. beca

use Nu–Way , I nc. is the owner of all stock in Nu–Way Distributing C o. We ag ree
. . . that such an equitable ownership i ntere st g ives one standing to bring a deriva tive suit. There fore , we conclude 7HB F h as s t an d i n g to bring this derivative suit.
Id. at 931 (c itations omi tted).
I n the instant case , the court of appea ls applied Roadside ’s rea soning and held that Webre’s

owner ship of Texas United stock made h im an “equitable owner of stock in United Salt beca use Texas United owns all of t he stock in United Salt.” 358 S.W.3d at 333 (citing Roadside St ations,
Inc. , 904 S.W .2d at 931). I n rea ching its decision, the court of appea ls explained that the post-1997
version of a

rticle 5.14(A) allows a “shar eholder ” to br ing a deriva tive lawsuit, and “the applicable

3 2version of article 5.14(A) does not exclude ‘equitable owner s’ from its definition of a share holder.”

Id. (citing T E X
. B U S
. C O R P
. A C T art. 5.14(A )(2) ).
The Court rec og nized that “the stockholders are the benef icial owner s of the assets of the
corpor ation” well over a centur y ag o. See Aransas Pass Harbor Co. v. Manning , 63 S.W

. 627, 629 (Tex. 1901)

. Recog nition of a share holder’s benef icial or equitable owner ship inter est is ba sed on

rea soning tha t “the shar eholder s are the ultimate ow ners of the corpor ate proper ty [because] when
the corpor ation is dissolved and its cre ditors are satisfied, they hold title to the assets in proportion

to their respe ctive share s.” Id. Fifty y ear s afte r Aransas Pass Harbor Co. , the Court reiter ated that
the conce pt of benef

icial owner ship means “the benef icial title to the assets of the corpor ation is in
the stockholders.” Humble Oil & Ref. Co. v. Blankenburg , 235 S.W .2d 891, 894 (Tex. 1951). The
Court held the plaintiff met the burden of proving he held title to stock in a corpor ation to maintain

a suit involving the corpor ation’s proper ty : “As the owner of 90 share s of the stock petitioner is the
benef icial owner of its proportionate part of the corpor ation’s assets and thus is the benef icial owner of an undivided interest in the property for which it sues.” Id. Fur ther, we rec ently

examined the
definitions of “bene ficial interest” and “bene ficial owner ship” in the context of transfe rring interests in a par tnership and a

limit ed liability

company : The leg al dictionary broadly define s “bene ficia l i ntere st” as “[a] rig ht or expectancy in something (such as a trust or an estate) , as opposed to leg al title to that thing.” B L A C K ’ S L A W D I C T I O N A R Y 885 (9th ed. 2009). Simi larly , we have said that “‘be nefic ial interest’ is profit , b en ef it or advanta g e resulting from contra ct or owner ship o f es tate as distinct from leg al owner ship or control.” Satterlee v. Gulf Coast W aste Disposal Auth. , 576 S.W .2d 773, 777 (Tex. 1978) (citing Christ iansen v. Dep’ t of Soc. Sec. , 15 Wash. 2d 465,131 P.2d 189 (1942))

. Reco rd t i t l e, o n the other hand, ty

pica l ly ref

ers to leg al evidenc e of a person’ s owner ship rig hts in proper ty

. See Longoria v. Lasater , 292 S.W .3d 156, 165 (Tex. App.—San Antonio

3 32009, pet. denied) (citing B L A C K ’ S L A W D I C T I O N A R Y 1523 (8th ed. 2004)).

“B enef icial owner ship” is define d as “[a] benef iciary ’s interest in trust proper ty ” or “a corpor ate share holder’s power to buy or sell the share s, though the share holder is not reg istered on the corpor ation’s books as the owner .” B L A C K ’ S L A W D I C T I O N A R Y 1215 (9th ed. 2009).
Milner v. Milner , 361 S.W .3d 615, 620–21 (Tex. 2012). Some courts have phrase d this conce pt of
benef icial owner ship or interest as one of equitable owner ship. E.g. , Cotten v. W eatherford Bancshares, I

nc. , 187 S.W .3d 687, 697 (Tex. App.—For t Worth 2006, pet. denied), disapproved of on other grounds by Ritchie , 443 S.W .3d 856 (“[S] hare holders of a corpor ation are equitable or benef icial owner s o f t h e co rporation’s assets.”) ; Martin v. Martin, Martin & Richards, Inc. , 12
S.W .3d 120, 124 (Tex. App.

— Fort Worth 1999, no pet.) (stating that “[t] he share holders of a
corpor ation are the equitable owner s of its assets,” and that share holders are the “bene ficial owner s of corpor ate proper

ty ”); Boston & Tex. Corp. v. Guarantee Life Ins. Co. , 233 S.W

. 1022, 1024 (Tex. Civ. App.—G alveston 1921, writ ref ’d) (“[T]he doctrine that the stockholders of a corpor ation are in f inal analy sis the equitable owne rs of its prope rty

. . . . is w ell fortified by authority in T exas, a s well as elsewhe re.” ). No matter the terminolog y , this C o u rt has never called into doubt the now familiar understanding that “the stockholde rs ar e the [benef icial or e quitable] owners of the assets of the c orpora tion.” See A ransas Pass Harbor Co. , 63 S.W . at 629.
Acc ording ly , we ag ree wit h Roadside and the court of appea ls’ rea soning. Article 5.14(A)( 2)’s definition of a share holder uses the term “i n cludes,” which “does not cre ate a presumption that components not expressed are excluded.” T E X
. G O V ’ T C O D E § 311.005(13). Thus,
under article 5.14(A)( 2), a share holder cer tainly includes “a benef

icial owner whose share s are held
in a voting trust or by a nominee on the benef i ci al o wn er’s behalf

,” but a share holder may also

3 4include othe r ty p e s o f benef

icial owner ship—like when a share holder of a pare nt holding corpor ation
has a benef

icial or equitable owner ship interest in a wholly owned subsidiary

. Our holding is once
ag ain buttressed by the fac t that the L eg islature made the statutory standing provision s of article 5.14(B ) inapplicable to closely held corpor ations. See T E X
. B U S
. C O R P
. A C T art. 5.14(L ). Be cause section (B ) did not apply to Webre, he was not require d to be “a share holder of the corpor ation [i .e., United Salt] at the time of the act or omission complained of.” See T E X
. B U S
. C O R P
. A C T art. 5.14(B ), (L ). Giving meaning to the L eg islature’s remova l of the require ment that Webre must be

a share holder in United Salt to asser t a deriva tive lawsuit on its behalf is con sistent with our conclusion that “the L eg islature has enac ted specia l ru l es t o all ow [a closely held corpor ation’s]
share holders to more easily bring a deriva tive suit on behalf of the cor p o ration.” Ritchie , 443
S.W .3d at 880–81 (citing T E X
. B U S
. O R G S
. C O D E § 21.563). Thus, in the closely held cor poration context, the deriva tive plaintiff is not require d to be a share holder of the corpor ation he is bring ing
suit on behalf of, an d t h e definition of a share holder does not exclude those with a benef icial or equitable interest in a subsidiary

. We conclude that the L egi s l at u re has provided for doublederiva tive suits of this nature. 1 4
Were we to hold otherwise, the direc tors of a closely held holding corpor ation could cre ate

a wholly owned subsidiary to circ umvent the L eg islature’s intent to make it easie r for share holders

W e l i m i t o u r h o l d i n g t o t h e s i t u a t i o n p r e s e n t e d i n t h i s c a s e i n w h i c h a s h a r e h o l d e r o f a c l o s e l y h e l d p a r e n t 14
c o r p o r a t i o n a s s e r t s d o u b l e - d e r i v a t i v e s t a n d i n g t o a s s e r t a c a u s e o f a c t i o n o n b e h a l f

o f a w h o l l y o w n e d s u b s i d i a r y
. T h i s s i t u a t i o n i s d i s t i n c t f

r o m o n e i n w h i c h a p u r p o r t e d s h a r e h o l d e r a t t e m p t s t o p u r s u e a d e r i v a t i v e a c t i o n b a s e d o n c o n d u c t t h a t o c c u r r e d b e f

o r e t h e p u r p o r t e d s h a r e h o l d e r h e l d a n o w n e r s h i p i n t e r e s t i n a n y s h a r e s o f a n y c o r p o r a t i o n
. S e e , e
. g
. , W i l l i s v
. D o n n e l l

y , 1 9 9 S

. W

. 3 d 2 6 2 , 2 7 6

– 7 8 ( T e x
. 2 0 0 6 ) ( d e c l i n i n g t o d e c i d e t h e q u e s t i o n o f “ w h e t h e r T e x a s l a w r e c o g n i z e s a d o c t r i n e o f e q u i t a b l e t i t l e t o s t o c k a n d t h e c o n t o u r s o f s u c h a d o c t r i n e ” b e c a u s e “ a l l t h e a l l e g e d b r e a c h e s o f f i d u c i a r y d u t y o c c u r r e d b e f o r e [ t h e p l a i n t i f

f ] b e c a m e a s h a r e h o l d e r a n d b e f o r e h e w a s e n t i t l e d t o s h a r e h o l d e r s t a t u s ” )

. 3 5to asser

t deriva tive proce eding s on behalf of closely held corpor ations. See id. I n considering this
prec ise issue, the Supreme Court of I llinois rec og nized that ref usal to rec og nize double-deriva tive standing would leave “[a] shar eholder of rec ord in the holding company
. . . without r emedy , even wher e
. . . the holding company is the wrong doer

. ” B r o w n v. Tenney , 532 N.E.2d 230, 233 (I ll. 1988). “The additional lay er in the corpor ate structure would preve nt the rig hting of many wrong s and would insulate the wrong doer from judicial intervention.” Id. (citation omitted); cf. Zauber , 591
S.W .2d at 937 (“The rea soning behind allowing a share holder to maintain a suit in the name of the
corpor ation when those in control wrong fully ref use t o m ai n t ai n it is that a share holder has a proprieta ry interest in the corpor ation.”). We believe such a result would be contra ry to the
L eg islature’s intent in removing the restric tions for share holder deriva tive proce eding s in the closely
held corpor ation context. Thus, in the closely held corpor ation context, we reje ct “an interpre tation [t hat] c ould de prive the corpor ation of any reme dy it mig ht ha ve as the result of wrong s done it by the major shar eholder s.” Eye Site, Inc. , 796 S.W .2d at 163.
I t is axiom atic that standing to asser t a deriva tive ac t i o n o n behalf of a wholly owned subsidiary

require s standing to a ssert a de rivative a ction on behalf of the pa rent c orpora tion. As a
share holder of Texas Un i t ed , W ebre has an equitable or benef icial owner ship interest in Texas
United’s assets. Texas United owns all of United Salt and the rig ht to asser t a share holder deriva tive
proce eding on behalf of United Salt. We have alre ady conclude d that Webre has standing to asser t

a deriva tive proce eding on behalf of Texas United, and there fore , he has stan d i n g to asser t a deriva tive proce eding on behalf of United Salt. The court of appea ls did not err in rea ching the same conclusion. See 358 S.W .3d at 332–34.

3 6III. Conclusi on

The L eg islature’s enac tment of the TBCA did not alter the way the business judgme nt r ule applies to the merits of der ivative lawsuits alleg ing that the direc tors or office rs of a closely held
corpor ation brea ched their duties to the corpor ation. To achie ve standi n g t o as s ert a deriva tive
proce eding under TB CA article 5.14, a share holder of a closely held corpor ation is not require d to plead and prove that the board of direc tors acte d outside of the protec tions of the business judgme nt rule in deciding not to pursue the corpor ation’s cause of action. Finally , we hold that Texas law

rec og nizes the availability of double-de rivative standing for share holders of a cl o s el y held pare nt
corpor ation to asser

t a deriva tive action on behalf of a wholly o wn ed s u b sidiary

. The court of
appea ls corr ectly reve rsed the trial court’s g rant of th e d ef en d an t s’ pleas to the jurisdiction and
motions to dismiss

. We aff irm the court of appea ls’ judgme nt and rema nd this case to the trial court for f urther pr ocee dings.

_________________________________ Paul W. Green J ustice

OPI NI ON DEL I VERED: May 29, 2015

3 7